Financial Stress and How to Plan Against It

I receive many emails each day from people who have had some kind of financial crisis. Most of these stories have a great many factors in common with each other, although the specifics can vary wildly. Here are some of the specific elements many of the stories share.

Something unexpected happened. Life was going along seemingly well until something happened. A job loss. An illness. A pay cut. A credit card cancellation. A car failure. Something triggers a big financial downturn.

You were operating without some type of financial safety net. The person in question often isn’t prepared for this unexpected financial downturn. They don’t have the resources on hand to deal with it.

Things you thought you could rely on weren’t as reliable as you expected them to be. The person doesn’t have credit available that they expected. Friends and family they believed would help them out didn’t come through. The landlord wasn’t as forgiving as they expected he would be.

You didn’t respond in the best way when the crisis first happened. Your first response to the crisis was often to either stick your head in the sand or to make another immediate financial mistake, such as putting the car repair bill on a credit card. Often, there are a sequence of small errors following the unexpected event.

The situation now seems unescapable. You’ve gone from where you were at before the unexpected event to a situation that now seems unescapable.

For me, the unexpected event was Sarah getting pregnant. The immediate bad move we made was to spend way too much money preparing for the baby.

Obviously, if I could roll the clock back to 2004, I’d do everything I could to prevent myself from rolling down that financial hill. Luckily, there are things people can address to take care of virtually every point of this story.

Have a plan
What exactly would you do if you lost your job today? What would you do if your car wouldn’t start today and needed a $3,000 repair? What would you do if you found out you had cancer today?

Do you have a plan? Or would you just panic?

It is much easier for people to imagine that their future is bright and perfect. I’ll always be healthy. I’ll always be able to work. I’ll always be able to go out and start that car and go wherever I want to go.

It’s never fun to think about failure, but spending some time thinking about these events right now when your mind is rational and you can conceive of rational plans to deal with them is far better than addressing them for the first time in a panic.

Have an emergency fund
An emergency fund is the perfect tool to stand in the way of any setback. Cash solves an awful lot of problems. It can pay the bills during a period of job loss. It can cover a car repair bill. It can keep you afloat if your credit card issuer cancels your card. It can help with almost any kind of family emergency.

I recommend that everyone have $1,000 in cash just sitting in their savings account, and everyone without any high-interest debt have at least two months’ worth of living expenses just sitting in cash in their savings accounts.

Have insurance
If you would be in a serious financial pickle if your spouse were to die, you need life insurance on your spouse. The same is true with long-term illnesses – disability insurance is vital. I don’t even need to make the case for health insurance. Auto insurance is usually a legal requirement.

Insurance is your safety net for extreme circumstances that emergency funds can’t cover. If you see situations (that have reasonable chance of occurring) in your life that you wouldn’t be able to handle, get insurance for that situation.

Choose reliable people
Are your friends and family reliable when the chips are down? Think about how they’ve acted when others have been in a pinch. Have they helped those people out? Or have they ran away?

You can also shore up such situations in your own life by standing by people in your life when their chips are down. People really need other people in their lives when things are wrong, and when you show that you’re true to them when they need you, they (and others in your life) are much more likely to be true to you when you need it.

I’m finding more and more articles that include having a plan as important when an emergency happen. I think that is great. I would also include knowing what the bare minimum you need is, what you can cut in the face of the emergency. Also, never be afraid to negotiate even the face of an emergency.

Having a plan is absolutely vital. Not that Plan A will work, it won’t, but the effort that went into planning will allow you to sort through the good and bad more quickly.

A sad thing that I have found is that while lots of people might be willing to help, they also have no idea of how to help and won’t make any effort to ask how. It seems best to ask them for specific, actionable things but expect them not to follow through if it is something important but not material like introducing you to a particular person.

2 months expenses seems like a good Emergency fund to me (personally, for my situation that is).

I am suprised at the blanket amounts people throw around.

I live in Canada, and health care is never going to bankrupt us out of pocket due to the universal coverage. I could lose my job, nothing is guaranteed, but I am guaranteed a big severance and unemployment unless I steal or do something completely unethical, which I wouldn’t do. I’m also a Chartered Accountant, which means I could find work rather quickly in just about any economy (not just in Canada, but other countries).

I have car insurance but don’t drive for work (live downtown), so if my car was in need of repair it wouldn’t be an emergency. I rent, so any household repairs are my landlord’s problem, and I have renters insurance if a fire destroyed my clothes/belongings.

I just can’t see an “emergency” which would need 6-12 months of living expenses saved up for myself. Glad to see Trent saying 2 months here.

Point is- For some people, massive emergency funds are just not necessary (although I’ve got huge amounts socked away for my downpayment which I could use as an emergency fund if necessary). Insurance and reliable friends/family are great just as important if not more important than an emergency fund.

Normally, in life, I like to look at things from a glass half full perspective. When it comes to financial planning, it’s important to look at things sometimes with a glass half empty viewpoint.

By this, I mean that we should be prepared for the “unexpected” by realizing that things aren’t really unexpected in many cases. Sometimes we get sick. Sometimes our cars don’t start. Sometimes our home gets damaged by weather. Whatever the case, thinking of things in terms of probabilities instead of “I can’t believe that happened!” makes it easier to save for such events.

I’m not saying we can predict the future, but we should all know that SOMETHING negative will happen at some point – we just have to account for this in our projections of how much we need to save. Just because we can’t foresee something happen doesn’t mean we should be unprepared.

@Adam, I also live in Canada. While I too, have the benefit of being able to rely on the province’s health care plan, I find your point of view optimistic, at best.

A severance package, however generous, will only last you so long. And even if the province’s unemployment benefits were to be available to you, your benefits would cover your ESSENTIAL BASICS (food, heat, and insurance payments) and not much else. That means that your mortgage (or rental payment), which the government deems as “discretionary” spending, would be left up to you.

That you feel you could find work rather quickly is something I also find optimistic. Clearly you haven’t experienced the devastating loss of a job in an uncertain economy. I speak from experience; I too, had an ‘indispensable’ career. I also had 19 (!) months of “emergency” funds available at my disposal. Imagine my shock when neither my severance package, my emergency funds, nor my well-funded retirement accounts were enough to see me through my difficult economic crises. Sometimes, Adam, life simply throws you under the bus.

I’m also a little shocked to read that your emergency plan includes the generosity of your friends and family. I wonder if you’ve shared this with them?

Please pardon my assertive response for I once shared your glass half-full joviality. I appreciate that I have a jaded point of view. For someone who prepared so intensely, however, I could not have imagined being so UN-prepared. Please re-think about the message Trent is sharing.

I agree with Erica that you are optimistic. My husband and son are the equivalent of chartered accountants who have experienced layoffs in uncertain economies (1990’s for my husband) over the years and the time it takes to find another job even in a desired career such as accounting. Luckily, my husband always taught as an adjunct professor on the side which helped cushion us.

We are also landlords. Not all household repairs are the “landlord’s problem”. If an item was working when you moved in and it didn’t break because of normal wear and tear, you are responsible. If you send grease down the garbage disposal or a large wad of toilet paper down the toilet or slam the screen door so that it comes off it’s hinges, you are going to be responsible for the repair. If your pet pees repeatedly in the carpet and you don’t clean it right away and the stain or smell remains after professional cleaning, you are going to have to replace the carpet. We have tenants whose washing machine hose broke and it flooded water all over the laminate flooring. Luckily they were home and immediately took action including going to the store to buy a dehumidifier to dry out the room. If they had put the machine on and then left for work, and the laminate warped, they would be responsible not the landlord.

We also have rental property in Florida that the tenants trashed the property. The same time, the house also needed repainting and plumbing updates that we were prepared for in order to put back on the rental market. We had $4000 in expected repairs and $4000 in unexpected repairs that the tenants deposit did not cover. Luckily we are good savers that we can cover the expense, but it hurts to be out of pocket that much all at once. We could go after the tenants in small claims court, but Florida has been hit hard economically and just because you win a judgment doesn’t mean that you can easily collect especially if you are not in the same state. I feel like I worked this past year just to see it go out the door with little to show for it. But that’s the risk of having rental property.
I think Trent has prepared a great message.

I am not trying to cast aspersions, but it took longer than 19 months to find a job, any job, that would keep you afloat? That is a pretty terrifying thought. What city do you live in Erica? I am planning to make a move to Montreal next year and if it is taking 2 years to find a job, that is pretty discouraging.

@Tara, my apologies; I should have clarified. I was fortunate enough to find another position in four months (excellent for 2009 prospects in my industry). I could never have predicted the entire department being swept out the door in an unanticipated “restructuring” a mere two months later. I scrambled, and managed to find a position paying 50% less (but a paycheck nonetheless) two months after that, so you can imagine the gut-wrenching shock when the company went under within weeks. Seriously… who the heck hires when they’re about to go under?!

I realize my situation is not a common one. But I cringe when I hear overly optimistic folks think it could never happen to them. I feel a right to speak up, since, by all accounts, I used to be one of them.

So, your thinking is I will need a huge pile of cash sitting in a non-interest bearing account because I could clog up the toilet and my landlord might not reimburse me?

Are you people even listening to yourselves?

I grant you that it is possible that there will be some massive accountant layoff at some point between now and when I hit 55 (I’d just retire after that if I couldn’t work, I save 20.5% of my income for retirement). I am going to night class to earn my CIP designation to branch out. I am also quite strong, and would take any job if I had to (including the family business, which would love to have a chartered accountant helping it).

So yes, there is a chance I could lose my job and not be able to find ANY job for 2 years in my chosen field or family business or phyiscal labour or whatever. There is also a chance a meteor could wipe out civilization as we know it. Again, I’ll risk it.

I am a huge proponent of emergency funds, but I hate when unlikely scenarios are used to scare people (I’m not saying that Trent is doing this, but others do). For instance, it’s possible that my car could need a $3000 repair tomorrow, but is that likely? My car is only 5 years old. Theoretically I could get cancer, but is that likely given my risk factors? Not very. Gotta keep it reasonable — there is plenty to prepare for without going straight for the worst-case scenario all the time.

I just wanted to drop in with a quick thought. Something totally unexpected happened to me and I had to deal with it. My car engine died due to an extremely rare issue caused my stupidity on my end and bad luck. I`m stuck forking over $3,000 after everything is said and done. This is clearly a stressful time for me. Luckily for me I will use the money from my emergency fund to pay for this.

If I was living paycheck to paycheck with no savings buffer I would probably be crying right now. I don’t want to come off as arrogant but I just wanted to promote the importance of an emergency fund. Bad things happen all of the time. They can happen to anyone. Please be prepared.

I often wonder what a 1000.00 emergency fund would do for you. I hope people don’t stop contributing to their emergency fund just becasue they have a 1000.00 in there. That is not enough for a majority of the population. I know for me, my mortgage is well over a 1000, so that is not even close to what i need. If i need to save for 6 months to a year’s worth of exenses, then i need to save about 20000 then i can say i have an emergency fund. I don’t know how some people do it but they must not have huge mortgage payments or living expenses.
What if you have private student loans where they will not give you a forebearance or deferrment, is a 1000.00 really enough for most people or do you need a lot more to feel safe. I often time thinks when blogs out there address the 1000.00 emergency stash, that they are addressing minimum wage earners and not middle class.

I’m going to pipe in here, too. Seven years ago, I had a good job as a marketing director. I was also a writer, making side income writing articles, in addition to my first book. I also made money as a speaker. I had no debt except my house, and about six months of expenses in my savings account.

Then one day I slipped and fell and my life has never been the same. I sustained a traumatic brain injury and am unable to work full time in any capacity. Because my injury impaired my ability to make decisions (let alone accept the severity of my injury because I “looked okay,)” I waited far too long to ability for disability.

In the four months following my brain injury, I tried and failed several times to return to my job before ultimately being let go. I lasted three years before losing my savings and my entire 401k, and finally my home. (It was for sale for 3 years before it finally sold in a market that utterly tanked. House values fell nearly 50% during that 3 year period).

I’m one of the lucky ones. I was blessed enough to meet my husband during this time, and he has been able to provide for me as I waited four years for social security disability to be approved.

You never know what life will throw at you, and you can never be over-prepared, especially if you have a family depending on you.

Dave Ramsey teaches the same principles in his Financial Peace University Course. He advises people to get $1000 emergency fund for that unexpected event. Then put away 6 months of expenses in a savings account for a job layoff or other problem. He advises people to get out of debt!!!! Very important to avoiding financial crises. I highly recommend his course for everyone, but especially those who find themselves in a tough financial situation.

I think the term “emergency fund” is being used in 2 different ways here.

One, which Trent discusses, is actually a fund to cover immediate emergencies, such as a large vet bill or a broken appliance. Although he suggests $1000 for this, I thinkl $3000 might be more realistic.

The other is more of a “catastrophe” fund, which would help you out in the event of major events such as large unreimbursed medical charges or extended jobless periods. I tend to agree with Suze Orman that 8 months is a wise amount to save; I also agree with most people I have read on FP blogs that this is an EXTREMELY difficult if not impossible amount to save.

@Andrew – you make an excellent point. Although I lump those examples/circumstances into one giant “uh-oh” pot, I can see how it might be useful to break out the $1000 (or $3000, or whatever, depending on your personal comfort level).

I wanted to clarify also, that I hadn’t made any suggestion toward keeping a large sum simply sitting in a low-yield savings account. That would be, er, silly. The point was to have cash available, preferably earning a high interest rate, that’s fairly inaccessible (i.e. working for you) while giving you a cushion should life take a tumble (hence my 19 mos. statement).

I agree that acquiring this level of savings is extremely difficult. And eeeeshk… even more difficult to watch it dwindle when the proverbial s&*% hits the fan. :(

@ md – I once had my engine stall for no apparent reason. I had it towed to the dealership, thinking if anything was wrong with the engine it was still under warranty. They told me it looked like a mouse got inside and chewed on the wires. It was the first time I ever heard of that happening, but it seemed like it was hardly the first time they’d seen it. Fortunately it only cost me $200 because they were telling me stories of even worse damage. Things do happen and truth is often stranger than anything you could make up.

@ Jen – sorry to hear that, but glad you have support and seem to look at the glass as half full. This is the kind of situation where a temporary fund obviously doesn’t totally cut it, although it can help a bit. I can be rather cynical about insurance, but it occurs to me rather frequently that disability/unemployment insurance doesn’t sound like such a bad idea (maybe it’s because my fingers are my work, it would be so easy to break one and be out of commision indefinitely — knock on wood).

Tip: anybody who is union, as I am required to be for my job, ought to look into their members’ credit card; apparently one of the benefits is that they will negotiate a hospital bill of $400 or more on your behalf.

I agree with Andrew. Saving a large sum of money is getting harder all the time. What you used to be able to put back in savings you now need for gas and rising grocery prices. The truth is that I am much more concerned about our finances now than when we were raising children.

My husband just turned 50, and I am not far from there. We do have about 6 months of money saved, but that does not seem like nearly enough if he were to lose his job. And that can happen to anyone. But we are paying for so much insurance it is unreal. Life, diability, car, flood (we live in Florida near the coast). We only have one child at home, almost 18, but I doubt he will leave home for several years. I spend as much to feed the three of us as I did when the other two kids were here. How can that be? Groceries, like milk and eggs, are double what they used to be.

My husband worked on the road construction for several years. He had to get himself to the job on his own money, pay for lodging and food, and send home what he could. I paid the bills, but we
did not have a lot of extras. I’m grateful for this experience though. We had to save. No one can support their family on unemployment.

Thanks for the clarification Erica – sounds like you went through some really unusually stressful circumstances. In preparation for my move, I am saving up 2 years of living expenses, and as soon as I am set up in my new city with a job, I plan to max out my TFSA yearly as an extended emergency fund. I already have a good-sized RRSP portfolio so that is taken care of and I have no debts. I am trying to make this move as smooth and stress-free as possible but I know it’s impossible to predict everything… Jen’s story of unexpected disability is something I worry about most. I will definitely be looking into a good disability insurance policy as I am single.

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